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Mutual Funds and Mutual Fund Investing - Fidelity Investments

Picking stocks with a thematic approach

Learn more about how to use themes to help make investing decisions, including:

The approach to thematic investing

How Fidelity's Stock Screener and research can assist

Risks to consider

What is thematic investing?

If you're interested in finding potential investments that align with trends—whether it's a new technology or a major societal change—you may want to consider supplementing your normal investment process with a thematic approach.

Thematic investing seeks to identify trends that are reshaping our world and invest in stocks that stand to benefit from their growth. Recent examples of groundbreaking trends include creative new uses for drone technology, the shift to cloud computing, and the growing adoption of solar power and other sources of renewable energy.

One of the biggest challenges with thematic investing is identifying trends that can stand the test of time. Keep in mind, not all themes offer groundbreaking or lasting new ideas. Some are merely fads or may just be early in the development cycle. Remember all the internet companies that sprung up in the late 1990s, like pets.com? Many of these companies were out of money and out of business within a couple of years. And many of the companies that did have staying power were overpriced at the time. The trend was real but valuations on many stocks were excessive, and came tumbling down during the stock market decline of 2001-2002.

So, while themes can offer a general starting point to generate investing ideas, it's important to do your homework. Make sure you understand the trend, the exposure provided by a particular investment, and whether it aligns with your objective, timeline, and tolerance for risk.

How can I use themes?

Many customers have told us that they want to align their personal values and interests more closely with their investing strategies. One way some customers begin this process is by identifying an investing theme that interests them, and then researching stocks that may fit within the parameters of the theme.

To help customers generate thematic investing ideas, Fidelity asked Zacks Investment Research to design a series of stock screens focusing on popular themes like big data, cloud computing, mobile payments, and robotics. While Fidelity believes these thematic screens can be a useful starting point for further research, we strongly encourage all customers to understand the risks and pitfalls inherent within any thematic investing approach.

How can I use Fidelity's thematic Stock Screener?

The themes developed by Zacks in the Fidelity Stock Screener are based on their proprietary stock databases and research. The screens are intended to identity companies that have even the tiniest exposure to a theme, based on publicly available company financial data such as research and development costs, product revenue, company press releases, as well as other proprietary stock research from Zacks.

Many of these themes represent important and emerging technologies, for sure, but it can be tricky to determine when a fad has turned into a tangible investment opportunity. A company identified in a screener may be spending some research and development on the technology associated with a particular theme, but it could be many years until it has any tangible impact on the company's earnings.

So, further research is absolutely necessary to determine if any particular company represents an investable opportunity related to a particular theme. Pump the brakes and do more research before you jump into something that looks like a worthy idea, but may not turn out to be a good investment right now. You may want to consider using these themes to create a watch list of stocks that require further research.

How can I dig deeper?

Once you've identified a theme you want to explore further, you can use Fidelity's research tools to narrow your universe of potential stocks with a variety of technical and fundamental filters. Among them are: capitalization, sector, price-earnings ratios, dividend yield, company maturity, and other measures of fundamental strength.

Here are 3 that may be particularly useful:

The Fundamental Analysis Score can help you evaluate the strength of individual companies. Developed by S&P Global for Fidelity, this score offers an overall assessment of a company's valuation, quality, growth stability, and financial health in relation to its peers. Get more details about the scores

Market capitalization typically corresponds to where a company may be in its business development. In general, expect small caps to have higher risk but also higher potential reward than large caps.

The Equity Summary Score by Thomson Reuters StarMine can help you understand a company's current strengths and weaknesses compared to its peers, based on historical performance. Generally, stocks with a higher Equity Summary Score are considered more attractive than stocks with lower scores.

Keep in mind that the Equity Summary Score is based on a traditional earnings model. So, small-cap growth stocks may have a lower Equity Summary Score. That's because they're often young companies that don't yet have reliable earnings. Over time, however, some can turn out to be successful investments.

Once you've narrowed your list of candidates, be sure to check out the stock snapshot page on Fidelity.com to evaluate the degree of current or potential exposure a stock may offer to a theme. You can use the Financial Statements and SEC Filings available there to help make that determination. To learn more about evaluating financial reports, complete this online course.

Don't forget the risks

Using a thematic approach to stock investing carries additional risks, as it can result in a higher concentration of smaller-cap stocks. These stocks have historically been more volatile than the stocks of larger, more established companies, which tend to have more broadly diversified business structures, along with steadier earnings and revenue streams.

While smaller companies may have the potential for more rapid revenue and profit growth, there is also an elevated risk that something could go wrong and derail rosy projections of rapid growth. The relatively limited resources of small companies can potentially make them more susceptible to a business or economic downturn. They may also be vulnerable to the intense competition and uncertainties of unproven products and markets.

Historically, small-cap growth stocks have tended to perform better than the overall market when stock prices are rising, while underperforming the market as stock prices fall. Therefore, investing in such stocks requires you to have a higher risk tolerance and a longer time horizon. Of course, you must always be aware that past performance does not guarantee future results.

To help manage risk, make sure to diversify across market caps and sectors. You may also consider mutual funds and ETFs, which can provide broader diversification as well as exposure to themes.

Do your homework

Tapping into the innovative trends that may reshape our world is exciting. But be careful not to let a seemingly promising story cloud your analysis. Use our Stock Screener to build a list of candidates for further research.

Then dig deeper, and do your homework to understand more fully the risks as well as the potential rewards.

Key takeaways

Thematic investing seeks to identify stocks that could benefit from a particular trend like drones, solar energy, or cloud computing.

Discriminating between fads and durable investing trends, and identifying investments that offer meaningful exposure to a theme can be challenging.

Some companies within a theme may be relatively young, which can result in a portfolio that's heavy on riskier small-cap, growth stocks.

Fidelity offers a stock screener and research tools to help you find and validate thematic investing ideas.

Explore more about how you can analyze investment opportunities using powerful tools.

Any screenshots, charts, or company trading symbols mentioned are provided for illustrative purposes only and should not be considered an offer to sell, a solicitation of an offer to buy, or a recommendation for the security.

The Equity Summary Score is provided for informational purposes only, does not constitute advice or guidance, and is not an endorsement or recommendation for any particular security or trading strategy. The Equity Summary Score is provided by Thomson Reuters StarMine, an independent company not affiliated with Fidelity Investments. For more information and details, go to Fidelity.com.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Investments in smaller companies may involve greater risks than those in larger, more well known companies.

Certain data elements, and certain thematic screens are provided by independent companies not affiliated with Fidelity and the views and values reflected therein may not be reflective of Fidelity's views.

The Fidelity Stock Screener is a research tool provided to help self-directed investors evaluate these types of securities. The criteria and inputs entered are at the sole discretion of the user, and all screens or strategies with preselected criteria (including expert ones) are solely for the convenience of the user. Expert Screeners are provided by independent companies not affiliated with Fidelity. Information supplied or obtained from these Screeners is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell securities, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy or approach to screening or evaluating stocks, preferred securities, exchange-traded products, or closed-end funds. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation, and other individual factors, and reevaluate them on a periodic basis.

Fundamental analysis scores

The 4 components are measured using a range between 1 and 100, with 1 being low, overvalued, or less healthy and 100 being high, undervalued, or healthy. The 4 components include:

Image is for illustrative purposes only

Valuation—The valuation metric combines fundamental data to determine if a company is overvalued or undervalued in relation to its peers.

Quality—The quality metric uses fundamental data to assess a company's overall earnings quality in relation to its peers. This metric uses information across all financial statements of the firm.

Growth Stability—Growth stability is an assessment of how stable the growth of earnings and cash flow has been over time. Companies with greater growth stability in comparison to their peers are more highly rated by this measure.

Financial Health—Financial health uses fundamental data to view the company's debt and interest obligations (among other factors) and its financial health in comparison to its peers.